What Is Volume Delta Analysis and What Are Some Best Platforms for It?

Given its volatility, trading in the cryptocurrency market is not for the faint-hearted. Trading in the volatile cryptocurrency market requires understanding key insights, identifying potential opportunities, and adapting to real-time market shifts.

Oftentimes, trading can feel like moving around in the dark, and this is where volume delta analysis comes in. Volume delta analysis is a beacon for predicting market shifts, helping traders deal with bullish and bearish trends. This article will discuss volume delta analysis, why it is important to the crypto space, and some of the best platforms to trade with.

Understanding Volume Delta

Volume delta works as a scale weighing buying and selling activity in the market. The calculation informs traders which buying or selling activity dominates at any given point in time. It is a tool used to identify areas of heavy trading activity while also confirming price action signals.

But how does volume delta work? Volume delta is calculated using candlestick charts. Each candle on a chart represents the time intervals across a chosen timeframe. As such, calculating the volume delta involves comparing the aggregated volume of buying (upticks) and selling (downticks) in each candle.

Take a 5-minute Bitcoin candle as an example. Suppose the total volume of transactions is 100 BTC. If the buying volume (with the buyers as takers) is 60 BTC, and the selling volume is 40 BTC, then the volume delta would be 20 BTC. It should be noted that depending on the situation, the buying volume could include buyers filling sell orders posted by market makers. In such cases, the market makers would be the takers in those specific transactions. The volume delta of 20 BTC indicates a positive delta, however volume delta calculations typically fluctuate around zero.

If a trading pair has zero delta, both buy and sell pressure are equal, indicating a balanced market. A positive delta reading, with a value more than zero, indicates more buying pressure during a specific period. Conversely, a negative delta (less than zero) means more sell pressure than buying pressure. The distance between the volume delta and the zero line represents the magnitude of the buying/selling pressure.

What is Volume Delta Analysis?

Volume delta analysis is a trading methodology that focuses on measuring the relationship between buying and selling volumes at different price levels. It goes beyond conventional volume analysis by providing insights into the imbalance of market forces and the intensity of buying or selling pressure.

Traders typically use Volume Delta Analysis to identify trends, reversals, and potential exhaustion points in the market, enhancing their ability to make informed decisions based on the market dynamics.

Why is Volume Delta so Essential?

Volume Delta analysis offers traders two major benefits: spotting divergences between the price and the CVD or using the volume as a confirmation for their trades. A good example of volume delta used as confirmation is its use in shorting strategies. Shorting occurs when a trader borrows shares or other assets and sells them at current market prices, hoping the price will eventually fall so they can repurchase them. In this case, a negative volume delta reading on that asset is valuable confirmation for the trader, indicating weaker buying pressure.

Understanding the Cumulative Volume Delta (CVD)?

Cumulative Volume Delta is a measurement tool used to analyse market dynamics. It is the accumulation of volume delta figures in a certain period, revealing a longer-term market analysis. CVD is calculated by subtracting the volume traded on the buying (or ask) side from the selling (or bid) side, or vice versa, depending on the asset and market conditions.

Nonetheless, CVD acts as a method for traders to gauge the overall market sentiment and strength of one side over the other, helping them make more informed trading decisions. Beyond identifying price shifts, it helps measure the factors influencing them. CVD tracks the cumulative difference between the volume of buy and sell orders over a specific time frame. Thus, CVD provides insight into traders’ actions and market forces affecting prices, which is particularly beneficial to cryptocurrency traders because applying traditional financial metrics to digital assets can be difficult.

Spotting Trends with Cumulative Volume Delta

All things being equal, a price increase would have a corresponding CVD rise, indicating more buying pressure. In a bearish market, where maintain a constant downward trajectory, lower price depths should correspond with a lower CVD reading.

Let’s take a look at this five-minute chart of Ethereum trades gotten from Bybit exchange:

Source: https://atas.net/volume-analysis/basics-of-volume-analysis/cvd-pro/#3

From the candle dynamics, we can see the day was bearish due to the steady decline in prices. The yellow line represents the CVD, and the blue line represents the Contract for Difference (CFD) indicator, which allows traders to estimate price movements of stocks, commodities, and currencies without necessarily owning the assets. The CFD indicator here filters out all trades below 1 ETH.

Analyzing the yellow and blue lines, we can see how the yellow line (CVD) mirrors the price trend movements since large-volume trades mostly influence it.

Applying Cumulative Volume Delta in Trading Strategies

Trading cryptocurrency requires tools that go beyond gut feeling. Tools like CVD gain traders an advantage, helping them navigate the uncertainties of the crypto market a little easier. Although CVD can point out price shifts on its own, its true beauty shines when combined with a larger trading strategy. CVD serves two primary use cases, including:

Trading Exhaustion

Exhaustion refers to a condition in the market where a particular trend starts to lose momentum. CVD is best suited for spotting these kinds of events. For example, suppose Bitcoin were to rise in price, but the CVD analysis does not push higher alongside it. In that case, it indicates a lack of buyer interest regardless of new price spikes. Traders interpret this signal as buyer exhaustion, in turn projecting a sell-off. Conversely, if the price dips but the CVD doesn’t, it is seen as seller exhaustion, meaning a price bounce is imminent.

Trading Absorption

Absorption in trading is a market condition where buying pressure is effectively absorbed by opposing forces (selling pressure, and vice versa) without causing a significant change in price. Analyzing CVD also gives clues that suggest the absorption of buying or selling pressure. Sharp spikes in CVD, while the price remains flat, indicate aggressive buying or selling pressure being absorbed. For instance, if Bitcoin’s CVD aggressively pushes higher while its price remains stagnant, sellers are likely to absorb the buying pressure. This phenomenon usually ends up in a sell-off. On the other hand, if Bitcoin’s CVD is plummeting while its price is stationary, it will be considered as buyers absorbing the selling pressure.

Traders can also use CVD to manage their open trades instead of just using it to spot potential reversals. Aside from using the principles of absorption and exhaustion to enter new trades, recognizing these signs can prompt traders to exit current trades, saving them from further losses.

For instance, imagine holding a long trade as Bitcoin’s price soars higher, but the CVD fails to follow suit. In this scenario, securing the profits on your position would be best, as this divergence suggests potential buyer exhaustion. Effective trading depends on actively monitoring CVD for signs of exhaustion or absorption, thus allowing more informed decision-making and management.

Popular Platforms for Volume Delta Analysis

Most of the popularly accepted trading platforms offer at least three major Volume Delta tools, including Volume Delta, Cumulative Volume Delta (CVD), and Volume Delta Divergence (VDD). Some of the best trading platforms featuring Volume Delta tools include:

TensorCharts

TensorCharts offers users a wide array of trading tools, including the Cumulative Volume Delta (CVD), Volume Delta Divergence, and Volume Delta Measure. It also provides good visualization, as the Volume Delta Divergence (VDD) tool embeds arrows directly on the price chart, pointing directly to bullish and bearish divergences that might have otherwise gone unnoticed. TensorCharts also offers adjustable calculation periods for each indicator, so traders can personalize their analysis, aligning it with their preferred timeframe and trading styles.

Source: https://www.tensorcharts.com/

The CVD in TensorChart is integrated with the price chart on one line graph. It is a paid tool, offering 3 plans- 5 individuals paying $8 a month for the Team plan, a premium plan costing $18 a month, and a data plan costing $25 a month. and its interval setting determines the window for cumulation, with zero signaling accumulation from the outset. Traders can modify the calculation periods for the Cumulative Volume Delta (CVD) and the Volume Delta Divergence (VDD), but other indicators have limited plotting capabilities.

TabTrader

TabTrader features a Volume Delta Measure tool that equips traders with comprehensive information about the volume, price changes, and CVD within a specific time frame. TabTrader also allows users tailor their visual experience by allowing them display the Volume + Volume Delta indicator either as a separate axis beneath the price chart or combined into one axis with the price chart.

Source: https://app.tabtrader.com/trading?list=Default&market=BITFINEX&pair=BTCUSD

Beyond visual preferences, TabTrader also allows users to fine-tune the calculation settings and periods for most of its tools, including the CVD. It is available for download on the Google Play Store, Apple App Store and also has a web app. It works with over 20 exchanges, covering over 20,000 crypto assets. It also provides notifications synced across all devices connected to the trader’s account.

GoCharting

GoCharting offers three volume delta tools: Bar Delta, Cumulative Volume Delta, and Delta Divergence. Bar Delta provides access to precise candle-by-candle analysis, CVD for gauging the forces affecting the market and delta divergence provides cues for spotting potential price shifts. The CVD can be enabled in the “Delta Bars” settings, replacing the default volume delta graph with the CVD graph.

Source: https://gocharting.com/terminal?ticker=COINBASE:BTCUSD

GoCharting displays the CVD in two ways: candlesticks and bars. The Delta Divergence option, when enabled, overlays colored bands on the CVD graph to indicate where the price and volume are diverging.

GoCharting offers free and paid versions, however, traders should note that the free version provides access only to data from the Bybit exchange. Users can access the platform via its website, or download the app for free from the Google Play Store and the Apple App Store. It is partnered with 15 other exchanges and covers up to 1500 crypto assets.

Conclusion

For traders seeking better foresight of market movements, Volume Delta Analysis proves an invaluable tool. It empowers traders to be more proactive in their trading by anticipating potential market shifts.

After exploring various platforms that support Volume Delta Analysis, it becomes evident that choosing the right platform is crucial for harnessing the full potential of this analytical approach. As markets continue to evolve, staying well-versed in this analysis and using the right platform will enable traders to navigate the complexities of financial markets with better precision.